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Section434(1)(a)inTheCompaniesAct,1956
Section433inTheCompaniesAct,1956
TheCompaniesAct,1956
Section434inTheCompaniesAct,1956
Section433(e)inTheCompaniesAct,1956

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KarnatakaHighCourt
EsteemEstatevsM/SUpkarDevelopers(India)Pvt...on28June,2013
Author:AravindKumar

UserQueries
jointdevelopment
registeredoffice
jointdevelopmentagreement
developmentagreement

professionalfees
section434

INTHEHIGHCOURTOFKARNATAKAAT

bonafide
bonafidedispute

BANGALORE

section434(1)(a)
legalfiction

DATEDTHISTHE28thDAYOFJUNE,2013

companypetition
sec433

BEFORE

unabletopay
securitydeposit

HON'BLEMR.JUSTICEARAVINDKUMAR
Co.P.No.211/2011
BETWEEN:
EsteemEstate
Representedby
1.Sri.G.Manoharan,
Agedabout54years,
S/olateGangaraju,
ResidingatNo.2,
VenkataramanappaRoad,
JaiBharathNagar,
Bangalore560033.
2.Sri.SureshMenda,
Agedabout53years,
S/oMr.Shyamsundar,
residingat
FlatNo.c3,SaiDwaraka,
SriuenApartsNo.22,
3rdCross,SultanPalya,
Bangalore560032....Petitioners
(BySri.ShivarudrappaShetkar,Advocate)
2

newindia
windingupofacompany
addendumisa
goodfaith
unabletopayitsdebts
substantiallycompliance

AND:
M/sUpkarDevelopers(India)Pvt.Ltd.,
Acompanyincorporatedunder
theCompaniesAct,1956
HavingitsRegisteredOfficeat
No.400,9thCross,
Off.R.V.Road,
NearSonataSoftware,
IIBlock,Jayanagar,
Representedbyits
ManagingDirector,
Sri.K.H.Khan.....Respondent
(BySri.Naganand,Sr.Counsela/wSri.Gouthamand
Rajeswar,Advocates)
ThisCompanyPetitionisfiledunderSections
433(e)and439oftheCompaniesAct,1956prayingto
theRespondentCompanymaybewoundupbythis
Hon'bleCourtundertheprovisionsoftheCompanies
Act,1956andetc.,
ThisCompanypetitionhavingbeenheardand
reserved,comingforpronouncementthisday,thecourt
madethefollowing:
ORDER

Petitionerisseekingforwindingupoftherespondentcompanycontendinginteraliathatithas
failedtopaytothepetitioner,itslegitimateduesandrespondentCompanyhasbecomeinsolvent
andassuch,itisjustandequitabletopassanorderofwindingup.
2.HeardtheargumentsoflearnedAdvocatesappearingforthepartiesnamely,SriShivarudrappa
Shetkar for petitioner and Sri S S Naganand, learned Sr.counsel appearing on behalf of Sri
Rajeshwar for respondent. Perused the averments made in the company petition, annexures
appendedtheretoandthestatementofobjectionsfiledbytherespondent.
3. It is the contention of Mr.Shivarudrappa, learned Advocate appearing for petitioner that
respondentcompanyisinthebusinessofdevelopinglandsanditownsapropertymeasuring36
acres3guntasoflandatKengeri,MysoreMainRoad,Bangalore
560 060 and it intended to develop the same by entering into a joint development agreement
andwasonthelookoutforprospectiveandsuperiordeveloperwhocouldmakehugeinvestment
andmakeproperuseofthelandandpetitionersbeingprofessionalagents/mediatorsinthefield
of real estate and development of land, their services came to be engaged by the respondent
company. Petitioner using its long standing experience introduced M/s.Era Land Marks India
Limited,NewDelhiforenteringintoajointdevelopmentagreementinrespectoftheabovesaid
landwiththepetitionerandforthesaidpurposespetitionersnegotiatedandmediatedwithsaid
developer for a very good offer being given to the respondent Company which was the highest
offer made by any developer during the said period. It is contended that pursuant to such
negotiation, respondent company entered into a joint development agreement on 05.07.2008

withM/s.EraLandMarksIndiaLimited,NewDelhiandsamewasdulyregistered.
3.1.Itiscontendedbythelearnedcounselthatpursuanttothesaidjointdevelopmentagreement
enteredinto,itwasagreedtobytherespondentcompanytopay1.25%oftheagreedlandvalueas
on the date of joint development which was ` 200 crores, as professional fee to the petitioner
namely, a sum of ` 2,50,00,000/ was agreed to be paid and accordingly an agreement was
entered into between petitioners and respondent on 26.04.2008 vide AnnexureB. It is
contended that out of said amount of ` 2,50,00,000/ a sum of ` 33,00,000/ was paid to one
SanjayByannaand a sum of ` 28,00,000/ to one Sri Jeevaraj and ` 23,00,000/ was paid to
each of the petitioners. Thus, the balance of ` 1,43,00,000/ was to be paid by the respondent
companytothepetitioner.
3.2.Itiscontendedthatoutof1.25%professionalfee,0.25%wastobepaidsoonafterlayingof
thefirstbuildingfoundationoftheprojectandcontendthattheprojectoperationisinfullswing
andnewspaperadvertisementshavebeenpublishedinvitingprospectivepurchaserstobooktheir
flats.However,therespondentcompanywasnotintendingtopaytheabovesaidamountthough
certificate issued by BMRDA indicated that project had commenced. It is contended by the
learnedcounselthatonlyduetotheeffortsputinbythepetitionerinsolvingallthedifferences
betweentherespondentcompanyandthedeveloperandmakingthe project to fall on the right
track, the respondent company is enjoying its fruits without making the agreed payment of `
1,43,00,000/tothepetitionerafterhavingbenefitedbytheprofessionalservicesrenderedbythe
petitionerinintroducingtheabovesaiddeveloper.
3.3.Itiscontendedthatrepeatedrequeststotherespondenttopaythesaidamountdidnotyield
anyresultandassuch,legalnoticecametobeissuedon17.01.2011callingupontherespondent
to pay the entireoutstandingamountanduntenablereplyhasbeen given on 01.02.2011 by the
respondent.Itisfurthercontendedthatrespondentcompanyisunabletopayitsdebtsandhence
liabletobewoundup.Itisalsocontendedthatrespondentcompanyisdeemedtobeunableto
payitsdebt.Hence,petitionerseekforanorderofwindingupoftherespondentcompany.
4. Per contra, Sri.Naganand, learned senior counsel appearing on behalf of Sri.Rajeshwar, for
respondent would contend that petitioner has miserably failed to establish that on the date of
issuanceofstatutory notice the registered office of the respondent company was located at the
addressmentionedinthesaidnoticedated17.01.2011orintheaddress mentioned in the cause
title of the present petition, but on the other hand respondent has produced the extract of the
master company details obtained from the website of the Ministry of Corporate Affairs as per
AnnexureR1which would indicate the registered office of the respondent company is at 41/1,
UIPAR Mansions, R.V.Road, Basavanagudi, Bangalore, Karnataka 560 004, and not at the
addresseitherspecifiedinthestatutorynoticeorintheaddressdepictedinthecausetitleofthe
petition.Assuchhecontendsthatthereisnosubstantialcomplianceofsection434(1)(a) of the
CompaniesAct,1956andassuchthepetitionisliabletobedismissed.Evenotherwiseonmerits
hewouldcontendthatpresentpetitionhasbeenfiledundersection433(e)andpetitionerhasto
necessarilyestablishanyoneoralltheingredientsofSection434(1)(a) to (c) andcontendsthat
undisputedly petitioner has not been able to demonstrate the alleged debt due having been
admittedbytherespondentordemandmadebypetitionersascontemplatedunder434(1)(a)has
notbeencompliedbyrespondentenablingthepetitionertoseekforwindingupofrespondent
Companyundersection434(1)(a).HewouldfurthercontendthatevenunderClause(c)of434(1)
petitionerhasnotbeenabletodemonstrate that said provision is attracted and it has notbeen
provedbythepetitionerthatrespondentisnotcommerciallysolventbyproducinganymaterial
toenablethiscourttoarriveataconclusionthatrespondentcompanyisunabletopayitsdebt
both contingent and prospective liabilities since it has become commercially insolvent and as
suchonthisgroundalsopetitionerisnotentitledfortherelief.
4.1.Hewouldfurtherelaboratehissubmissiontocontendthatevenonfactsitcanbenoticedthat

petitionerisbasingitsclaimbyvirtueofanallegedagreementormemorandumwhichhasbeen
signedbytherespondentcompany'sManagingDirectordated26.04.2008andbyitselfithasno
legs to stand inasmuch as there are certain conditions which ought to have taken place even
accordingtothepetitionerandthesaidconditionsstipulatedthereinhavingnottakenplacesame
cannotbeenforcedsinceitistermofthecontractthatwhatisagreedtoisconditional.Hewould
alsosubmitthatunderclause3.4(b)amounthadtobepaidtoHUDCObythedeveloperM/s.Era
Landmarks India Limited, New Delhi which has not been paid and as such there was no
obligation on the part of the respondent to adhere to the terms stipulated in contract or
agreementdated26.04.2008.
4.2. He would submit that the dispute between the parties being a bonafide dispute and when
thereisnoobligationonthepartoftherespondenttopayanyamounttothepetitionerunderthe
alleged contract or agreement dated 26.04.2008 and when there is a dispute with regard to
entitlementofthepetitionerstosuchpayment,thedefenceraisedinthestatementofobjections
istobeconstruedasa`bonafidedispute',whichcannotberesolvedinthepresentpetitionandas
suchpetitionershavetoworkouttheirremedyinappropriateproceedingsbeforeajurisdictional
forum.Hewouldalsosubmitthatthelimitationwithregardtoenforcementofallegeddebtdue
by respondent to petitioner being in dispute same cannot be examined by this court in the
presentpetition.
4.3.Hewouldalsocontendthatnopresumptioncanbedrawnunder434(1)(a)thatrespondent
company is unable to pay its debt for being ordered to be wound up, unless the petitioner
companyhaspleadedandprovedtothesatisfactionoftheCourtthatinthefactsofthecase,such
asituationhasarisennamely,therespondentcompanyisunabletopayitsdebtbytaking into
account the contingent or prospective liabilities of the respondent company. He draws the
attentionofthecourtintheinstantcasepetitionerhasneitherpleadednorprovedtheseaspects
andassuchpetitionerisnotentitledforthereliefsoughtfor.
5. At the request of petitioner's counsel, the matter was listed on 21.06.2013 and a memo has
beenfiledbythelearnedcounselforthepetitionerenclosingthephotocopyofthe'returnedcover'
whichcontainsanendorsement'nosuchcompany'whichisclaimedtohavebeendespatchedby
thelearnedcounselforthepetitionerthroughcouriertotheregisteredofficeoftherespondent
company and the visiting cards of the tenants said to be in occupation of the said premises to
contendthatregisteredofficeoftherespondentcompanyisnotlocatedintheaddressavailable
withtheROCdepictingtheregisteredofficeoftherespondentcompany as mentioned therein.
HewouldalsodrawtheattentionoftheCourttothereplynoticedated22.02.2012issuedbythe
respondentcompanywhereundertherespondentcompanyitselfhasadmittedthatitsregistered
officeisattheaddresstowhichthestatutorynoticehasbeenissuedandhence,itdoeslieinthe
mouthoftherespondentcompanytocontendcontrarytoitsownadmission.Hence,hepraysfor
rejecting the contention raised in this regard and prays for an order of winding up of the
respondentcompanybepassed.
6.HavingheardthelearnedAdvocatesappearingforthepartiesandonperusalofthepleadings
aswellasthedocumentsappendedtheretoandafterbestowingmycarefulattentiontotheoral
arguments advanced by the respective learned Advocates, I am of the considered view that
followingpointswouldariseformyconsideration:
(1)Whetherthestatutorynoticedated17.01.2011AnnexureEissuedbypetitioneris
contrarytoSection434(1)(a)oftheCompaniesAct,1956?

(2)Whetherthepetitionerhasmadeout
acaseforwindingupofthe

respondentcompanyunderSection434(e)and439oftheCompaniesAct,1956?
OR Whether the defence set up by the respondent company is frivolous and not a
bonafide dispute so as to reject the same and grant the prayer sought for by
petitioner?
FACTUALMATRIX:
7. Petitioner and respondentcompany represented by its Managing Director entered into an
agreementon26.04.2008AnnexureBwhereunderitwasagreedthatrespondentwouldpayto
thepetitioneraprofessionalfeeof1.25%(exclusiveofservicetax)onthevalueoflandagreedfor
joint development which was valued at ` 200 Crores. It was also agreed that 1% of the
professionalfeewouldbereleasedonthesamedayinproportionatetoreleaseoffundstowards
advanceof`35CroresbythedeveloperM/s.EraLandMarksIndiaLimited,NewDelhi,which
wasagreedtobereleasedaftergettingsuchadvancepaymentfromthedeveloper.Itwasfurther
agreedthatrespondentwouldpaytheremaining0.25%soonafterthefirstbuildingfoundationof
the project. In other words, the total professional fee agreed to be paid by respondent to
petitionerwasRs.2.50Crores.Thepetitioneralsoagreedfortherespondentmakingpaymentof`
33,00,000/directlytoM/s.SanjivBayanaofDelhifromoutofthetotalprofessionalfeeof`2.5
Crores.
8. The basis for entering into such contract between the parties was on account of the land
measuring36acres4guntassituatedatKengerivillage,BangaloreSouthTalukwhichhadbeen
converted for residential purposes being available with the promoters/directors of the
respondentcompany and they were on the look out of a developer with repute and who was
capableofinvestinghugeamountandwasapproachedbythepetitionerwhoagreedtousetheir
expertise in the field of real estate and secure a developer. In this direction, the petitioner has
introducedM/s.EraLandMarksIndiaLimited,NewDelhi,totherespondentcompanyandafter
negotiation and discussion, the offer made by the said developer to the respondentcompany
whichwasthehighestofferbyanydevelopermadeduringthesaidperiodcametobeacceptedby
the respondent company and accordingly a joint development agreement came to be entered
into between respondentcompany and M/s.Era Land Marks India Limited, New Delhi on
5.07.2008AnnexureAwhichwasdulyregisteredintheofficeofSubRegistrar,Kengeri. Prior
totheexecutionofsaidjointdevelopmentagreement,agreementdated26.04.2008AnnexureB
referred to herein above came to be entered into between the petitioner and the respondent
company.
9. It is not in dispute that pursuant to the agreement dated 26.04.2008 AnnexureB entered
intobytherespondentcompanywiththepetitioner,thefollowingamountshavebeenpaid:
i)`33lakhspaidtoSriSanjivBayana
ii)`28lakhspaidtoSriJeevaraj
iii)`23lakhspaidtoeachofthepetitionersThus,inall,`1,07,00,000/waspaidby
the respondentcompany under the agreement dated 26.04.2008 AnnexureB. On
thesefactualaspects,thereisnodisputebetweentheparties.
CONTENTIOUSISSUE:
10. The claim of the petitioner is: under agreement dated 26.04.2008 AnnexureB the
respondentcompanywasrequiredtopaytothepetitionerthebalanceamountof`1,43,00,000/
immediately after laying of the first building foundationof the project to be constructed by the
developerasperthejointdevelopmentagreementanddespitelayingofthefoundationtothefirst
building of the project having been completed as per the permission granted by the Bangalore
Mysore Infrastructure Corridor Local Planning Authority and said amount has not been paid

whichwasduetothemdespitedemandmadebypetitioner.Thereafterpetitionerissuedstatutory
noticedemandingpaymentofthebalanceamountandduetononcomplianceofsaiddemandby
therespondentcompany,present petition seeking winding up of the respondent company has
beenfiledcontendingthatrespondentisunabletopayitsadmitteddebt.
11. Respondent has contended that joint development agreement entered into between
respondent and M/s.Era Land Marks Limited on 05.07.2008 came to be modified and an
addendum(supplementary)agreementcametobeexecutedbetweenthe parties on 28.10.2009
andtheamountagreedtobepaidbythesaiddevelopertoHUDCOtowardstheoutstandingloan
amount of the respondent, having not been complied with by the said developer there was
improperfulfillmentoftheconditionstipulatedandinviewofthesamethepetitionerswouldnot
beentitledtocontendthatalltheconditionsstipulatedintheagreemententeredintowiththem
on26.04.2008AnnexureBbyrespondentistobecompliedandassuch respondentcompany
contended that it is not liable to pay the professional fee of 1.25%. It was also contended that
under the joint development agreement, developer was to get 37% undivided interest and on
account of subsequent development, the said percentage got reduced to 29.5% and so also the
securitydeposittobepaidbydevelopertorespondentcametobereducedfrom`35Croresto`
25 crores and hence it is contended that payments made to the petitioner is itself a excess
paymentandassuch,theyarenotentitledtoanyfurtherpayment.
RE:POINTNO.(1):
12.The learned counsel for the petitioner has vehemently contended that respondent itself has
admitteditsregisteredofficeisattheaddressmentionedincausetitleandassuch,itcannotnow
turnaroundandcontendthatitsregisteredofficeisnotatthataddressbutelsewhere.
13. The Division Bench of this Court in THE SUNDUR MANGANESE AND IRON ORES
LIMITED, YESHWANTNAGAR, KARNATAKA V/S MANGANESE ORE (INDIA) LIMITED,
NAGPURreportedin2001(4)Kar.LJ590hasheldthatwhenapetitionisfiledunderSection433
(e)thenoticeofdemandifnotsenttotheregisteredofficebuttotheadministrativeofficecannot
be held to be sufficient compliance with the statutory requirement to raise a presumption that
companyisunabletopayitsdebts.Ithasbeenheldasunder:
"7. The language employed in Section 434(1)(a) of the Act is significant. While the
section provides that the mode of service can be either by 'registered post or
otherwise',itdoesnotprovidetheplaceofserviceas'attheregisteredofficeorother
office',butspecificallystatesas'atitsregisteredoffice'.Further,whiletherequirement
'ademandunder his (creditor's) hand' is explained in subsection (2) as including a
demand signed by any agent or legal adviser duly authorise, there is no such
explanation in regard to the requirement relating to service at 'registered office' by
clarifyingthatserviceatanadministrativeofficeofbranchofficewillalsobeserviceat
registered office. In the absence of any explanation or further deeming provision
enablingtheinterpretationofthewords'deliveredatitsregisteredoffice'asmeaning
'deliveryattheadministrativeoffice',itisnotpossibletoholdthatserviceofnoticeat
an office other than registered office as sufficient compliance with Section 434(a)(a)
requiringserviceatregisteredoffice.
8.Itiswellsettledthatalegalfictioncanberaisedasprovidedunderastatute,only
when the conditions stipulated for raising such legal fiction are strictly and fully
compliedwith.Wherethespecificrequirementsarenotcompliedwith,nolegalfiction
willarise.Alegalfictioncannotberaised,whentheconditionsspecifieddonotexist,
onthegroundthatthereissubstantialcomplianceorimpliedorinferredtheground
that there is substantial compliance or implied or inferred compliance of the
requirements to be fulfilled for raising the legal fiction, unless such lesser or

alternativecomplianceispermittedbyanexplanationoranotherdeemingprovision.
AsobservedbytheSupremeCourtinCommissionerofIncometax,BombayCityIIv
Shakuntala and Others, a legal fiction cannot be created by travelling beyond the
languageofthesectionbywhichitiscreated.Thereforeifacreditorwantsthebenefit
ofthelegalfictionunderSection434(1)(a)thataCompanyisunabletopayitsdebts,
he has to strictly fulfil all the conditions stipulated therein for raising such legal
fiction.
9. The Courts have consistently held that requirements of Section 434 should be
strictlycompliedwithandtheserviceofthenoticeshouldbeattheregisteredofficeof
the Company (and not any other office), to raise the presumption under Section
434(1)(a)."
14. Though a valiant attempt has been made by the learned counsel for the petitioner to drive
homethepointthatrespondentitselfhasinitsreplynoticeadmittedthatitsregisteredofficeisat
the address reflected in the statutory notice and the memo filed on 21.06.2013 would also
evidence this fact would not be a ground to accept the said plea, since consent does not confer
jurisdiction.
15.ThecertificateofincorporationofrespondentcompanyasperExtractproducedatAnnexure
R1 along with Statement of objection would indicate that registered office of the Respondent
Companyislocated at No.41/1, Uipar Mansion, R.V.Road, Basavanagudi, Bangalore and not at
the address shown in the statutory notice. Hence, there is noncompliance of Mandatory
requirementofSec.434(1)(a)ofCompaniesAct.
16.Inthatviewofthematter,pointNo.(1)hastobeansweredagainstthepetitionerandinfavour
oftherespondent.
RE:POINTNo.2:
17.Thepetitionerisseekingforwindingupoftherespondentcompanyonthegroundthatitis
unabletopaythedebtduetothepetitionerinasumof`1.43Croresdueunder the agreement
dated 26.04.2008 AnnexureB. Respondent to stave off such a claim has filed detailed
statement of objections contending interalia that a bonafide dispute exists with regard to such
payment and the basis for the petitioner to claim the said amount is based on the joint
developmentagreementdated05.07.2008itselfhavingencounteredroughweatherandlitigation
havingarisenthereunder,theclaimofthepetitionerrecedestothebackgroundandonthatscore
andalsoonaccountoftherebeingaseriousdisputebothwithregardtolimitationtomakesucha
claim by the petitioner and there being no amount due by the respondent to the petitioner,
proceedingsforwindingupisnotmaintainable.
18.Respondenthascontendedthatagreementdated26.04.2008enteredintowiththepetitioner
hasceased to be in operation on account of subsequent development namely, the respondent's
undivided interest getting reduced from 37% (as per original agreement dated 05.07.2008) to
29.5%(asperAddendumagreementdated28.10.2009),securitydepositpayablebydeveloperto
respondent being reduced from ` 35 Crores to ` 25 Crores and HUDCO loan which was to be
cleared by the developer within 90 days not having being cleared as the prime reasons for not
paying the amount to the petitioner. In the light of this defence raised by the respondent, it
requires to be examinedastowhetherthesaiddefenceisasubstantialone, a bonafide dispute
anditisnotamoonshinedefencetostaveoffthecreditornamely,petitioner.Inthisbackground,
before examining the facts on hand, let me state the law laid down by this Court and by the
Hon'bleApexCourtinthisregard.

19.IthasbeenheldinDIVYAEXPORT

ENTERPRISESV/SPRODUCINPRIVATELTD.,

reported in ILR 1990 KAR 1610 that whenever respondentcompany comes forward and sets
forthitsdefence,companyCourtwillhavetoexaminethenatureofrespectivecasespleadedby
thepartiesandifaprimafaciecaseismadeoutbythepetitioner,then,theonusofdisprovingit
byshowingthatthedefenceisingoodfaithandoneofsubstancewouldshiftonsuchrespondent.
Ithasbeenheldasunder:
"17. If the respondent company pleads a defence in good faith and puts forth a
substantial case against the petitioner's claim, the petition for winding up will be
rejected. A mere assertion of a debt payable by the respondent company is not
sufficient to attract the discretion of the Court in favour of the petitioner. The
principlegoverningtheexerciseofCourt'sdiscretionisextractedinthedecisionofthe
Division Bench of this Court in HEGDE & GOLAY LIMITED vs STATE BANK OF
INDIA.
"A basic question arises, does the Court have a discretion under Section 222(e) and
223? The general rule is that where a petitioning creditor can prove that his debt is
unpaidandthecompanyisinsolventitisthedutyoftheCourttodirectawindingup
andthecreditor is entitled to an order ex debito justitiae. On the other hand, it has
beensaidthatthelatterisphrasewhichmeansnomorethanthatinaccordancewith
settled practice the Court can only exercise its discretion in one way namely by
grantingtheorder.Thesestatementscanbereconciledonthebasisthatalthoughthe
matteris'acompleteandunfetteredjudicialdiscretion'thediscretion is exercised in
accordance with certain established principles, but the principles do not bind the
Courtinanallornothingway.Inaccordancewiththeseprinciplesthecreditorhasa
primafacierighttoawindinguporderwhichissubjecttocertainexceptions."
Again,Palmerisquoted,astotheexceptionalcircumstancesunderwhichdiscretiontowindup
wouldnotbeexercised:
"(1)Wherethepetitioner'sdebtislessthan$200
(2)Thedebtisbonafidedisputedbythecompany
(3)thecompanyhaspaidortenderedpaymentofthepetitioner'sdebt
(4)thewindingupisopposedbyothercreditorsand(5)thecompanyisintheprocessofbeing
woundupvoluntarily."
WordsofcautionagainstinvokingtheCourt'sjurisdictiontopressurizeacompanyarefoundin
the decision of the Supreme Court in AMALGAMATED COMMERCIAL TRADERS P. LTD. vs.
A.C.K.
KRISHNASWAMI&ANOTHER:
"It is well settled that a winding up petition is not a legitimate means of seeking to
enforce payment of the debt which is bonafide disputed by the company. A petition
presented ostensibly for a winding up order but really to exercise pressure will be
dismissed,andundercircumstancesmaybestigmatisedasascandalousabuseofthe
processoftheCourt.Atonetimepetitionsfoundedondisputeddebtweredirectedto
standovertillthedebtwasestablishedbyaction.Ifhowever,therewasnoreasonto
believethatthedebt,ifestablished,wouldnotbepaid,thepetitionwasdismissed.The

modernpracticehasbeentodismisssuchpetitions.But,ofcourse,ifthedebt,isnot
disputed on some substantial ground, the Court may decide it on the petition and
maketheorder."
18.ThetestappliedbytheSupremeCourtintheabovecasewas,whetherthenonpaymentof
theclaimbytherespondentcompanywasacloaktohideitsinabilitytopayitsdebts.
19. When a prima facie case is made out by the petitioner, the respondent may putforth a
substantialdefenceagainstitifsuchadefenceisbonefide,Court'sdiscretionwillbetodismiss
thepetition.
20. In M/s. MADHUSUDAN GORDHANDA & CO. V/S MADHU WOOLEN INDUSTRIES
PRIVATELTD.,theprinciplesareagainstated(at2605):
"TheprinciplesonwhichtheCourtactsarefirstthatthedefenceofthecompanyisin
goodfaithandoneofsubstance,secondly,thedefenceislikelytosucceedinpointof
law and thirdly the company adduces prima facie proof of the facts on which the
defencedepends."
21.When can a dispute be termed as a bona fide one? When is it to be treated as substantial?
Thesequestionsaredifficultofapreciseanswerinabstract.Theseareintherealmoffactsand
eachcasewouldchurnoutdifferentanswers.ButtheCourtcanrefertocertaintestsenvisagedin
similarcircumstances,thoughnotexactlyundertheprovisionsoftheCompaniesAct.Inthecase
ofasuitfiledunderOrder37oftheCodeofCivilProcedure,thedefendanthastoseekleaveofthe
Courttodefendagainsttheclaim.Ithasbeenheldthatifthedefencecouldbehonestandbona
fide,leaveshouldbegrantedadecisionwhetherthedefencepleadedisbonafideorhonestatthe
initialstageofasuit,canonlybehazardousbut,still,theCourtiscalledupontoapplyitsjudicial
mindonthisquestion.Similarlyisthesituationwhen,therespondentcompanyisaskedtoshow
causeagainstawindinguporder,attheinitialstagetherespondent,here,hastoshowcauseas
towhythepetitionfiledshouldnotbeadvertisedsuchanadvertisementhasadverseeffectson
the reputation of a company and therefore, it is given an opportunity to show cause against
orderingtheadvertisement(vide:THENATIONALCONDUCTS(P)LTD.V/SS.S.
ARORA).Therefore,whenevertherespondentcompanycomesforwardandsetsforthitsdefence,
thisCourthastoexaminethenatureoftherespectivecasespleadedbythepartiesandifaprima
faciecaseismadeoutbythepetitioner,therespondentshouldshouldertheonusofdisprovingit,
byshowing that its defence is in good faith and one of substance, and it is likely to succeed in
pointoflaw."
20. The Division Bench of this Court in the case of SHAKTI PRAKASH METAL FINISHERS
PRIVATE LIMITED, BANGALORE V/S HINDUSTAN MACHINE TOOLS LIMITED (HMT
LIMITED) BANGALORE AND ANOTHER Reported in 2001(6) KAR.L.J 467 has held that
violationofthetermsofthecontractcannotipsofactocomewithinthepurviewofSection433of
the Companies Act for winding up and non payment of bill amount under a contractual
agreementcannotbesaidtobeanadmitteddebtevenwhenitisdisputed.Itisheldasunder:
"7.Onconsideration,wefindthataspertheavermentsthereisacontractbetweenthe
appellantandtherespondentsandthesamehastobedealtwithasperthetermsof
the agreement. Any violation of the terms of the contract cannot ipso facto come
within the purview of Section 433 of the Companies Act for winding up of the
company. It is also seen that it is not the legislative intention that Company Court
shouldbeconverteditselfintoanordinaryCivil Court and proceed to hold a trial at
the instance of individualclaimingtobe acreditor of the company onthe basisof a
contract.Underthecircumstances,nodirectionsasprayedforcanbeissued.Itisalso
seenthatnonpaymentofbillamountunderacontractualagreementcannotbesaid

tobeanadmitteddebtevenwhenitisdisputed.Thatapart,debtissomethingwhichis
borrowedbyapersononsettledtermsandconditionsandsettledrateofinterestand
itcanalsoberesettledbetweentheparties.Bethatasitmay.Inanyviewofthematter
andinthefactsofthegivencase,itcannotbeinvoked.Asdiscussed,wedonotfind
any error or illegality in the order of the learned Single Judge so as to call for any
interference.Thiswritappealisdismissed."
21.TheApexCourtinM/SIBAHEALTHPVT.
LTD.,V/SINFORDRIVESYSTEMSSDN.BHDReportedin2010AIRSCW6282hasheldthat
existenceof'bonafidedispute'impliestheexistenceofsubstantialgroundforthedisputeraised
and in such circumstances where it is found that contested debt is doubtful company Court
shouldnotentertainapetitionforwindingup.Ithasbeenheldthereinasfollows:
"24. Reference was also made to another decision in Shailendra Dania & Ors. V/s
S.P.Dubey & Ors. [(2007) 5 SCC 535]: (AIR 2007 SC (supp) 208: 2007 AIR SCW
3553),whereasimilarquestionaroseinconnectionwiththeeligibilityforpromotion
whereindifferentialserviceexperiencebasedondifferentialeducationalqualifications
had been prescribed and longer period of service experience was prescribed for
diplomaholderJuniorEngineersincomparisontodegreeholderJuniorEngineersfor
the post of Assistant Engineer. Explaining the rationale behind the permissibility of
making such a distinction, this Court held that the difference between the service
qualifications has been an essential criterion for promotion based on interest of an
establishment.Whileconsideringthesaidquestion,thisCourthadalso the occasion
toconsiderthepossibilityoftwoviewsbeingtakenwhileinterpretingaparticularset
of service rules. In such a situation, this Court held that the rules should be
interpreted in consonance with the practice followed by the department for a long
time.Infact,whilearrivingatsuchaconclusion,thisCourthadalsotheoccasionto
considertheearliercaseofN.SureshNathan(AIR1992SC564:1992AIRSCW
181)(Supra)."
22.Section433oftheCompaniesActenablesthisCourttowindupacompanyifitisunableto
payitsdebts.Saidexerciseofpowerisdiscretionaryandithastobejudiciouslyexercised.Ifthe
respondentpleadsputtingforthdefencethatclaimofthepetitionerisgenuinelydisputedandifit
can be construed as a bonafide dispute, then, this Court would be loath in exercising the said
discretionfororderingwindingupofthecompany.
23.Inthelightofwhatisstatedabove,letmeexaminethefactsonhandtoanswerpointNo.(2)
formulatedhereinabove.
24. It is not in dispute that reason for respondent entering into a contract dated 26.04.2008
AnnexureBwiththepetitionerandclaimingtheamountisthejointdevelopmentagreementthe
respondent has entered into with M/s.Era Land Marks India Limited, New Delhi. Under the
agreement dated 26.04.2008 (AnnexureB) respondent had agreed to pay to the petitioners a
totalsumof`2.50Crores.Theconditionsstipulatedthereinwhichwouldentitlethepetitionerto
claimthesaidamountfromrespondent'sareextractedhereinbelow:
"1. We agree to pay your Professional fee of 1.25% (one & quarter percent plus service tax) on
value of the land agreed for Joint Development. The lump sum value of the land is about `
200.00Cr.(RupeesTwohundredCroresonly)
2.NecessaryTDSshallbedeductedfromtheProfessionalfee.
3. However we will release 1% (One percent) of the Professional fee on the same day in
proportionatetoreleaseoffundstowardsadvanceof`35.00r.(RupeesThirtyfiveCroresonly)

fromM/s.ERALANDMARKSINDIALIMITED,NewDelhi.Thepaymentshallbereleasedafter
getting advance payment from Developers. Remaining 0.25% (Quarter percent) shall be paid
soonafterthefirstbuildingfoundationoftheprojectatKengeri.
4.ThetotalProfessionalfeepayableis`2.50Cr.(RupeesTwoCroresfiftylakhsonly).Thisisin
fullandfinalsettlementofyourclaimforthesaiddealasspeltinyourabovereferredletter.
5.Asperyourabovecitedletter`33,00,000/
(RupeesThirtythreelakhsonly)shallbedirectlypaidtoM/s.SanjivBayanaofDelhi
fromthetotalprofessionalfeeof`2.5Cr.(RupeesTwoCrorersFiftylakhsonly)and
thebalance`2.17Cr.(RupeesTwoCroresSeventeenlakhsonly)shallbepaidtoyou
infullandfinalsettlementofthedeal."
25. It is not in dispute that petitioner was successful in ensuring that respondent company
enters into a joint development agreement with M/s.Era Land Marks India Limited on
05.07.2008whichisatAnnexureA.Thesaidagreementstipulatestheconditionsrequiredtobe
performed by each of the parties. All such reciprocal promises required to be performed as
stipulatedintheagreementisnotrequiredtobedelveduponbythisCourt.However,someofthe
essential terms of the said contract which would have a bearing on the claim of petitioners are
extractedhereinbelow:
(1) The developer was required to pay a security deposit of ` 35 Crores to the
respondent.
(2)Theundividedsharetowhichtherespondent
companywasentitleddeterminedat37%.
(3)ExistingHUDCOloanraisedbytherespondentanditsstakeholderswasagreedto
beclearedby the said developer M/s.Era Land Marks India Limited within 90 days
fromthedateofJointDevelopmentagreement.
Undisputedly,petitionerhadparticipated,negotiatedandmediatedforthepartiestoenterinto
joint development agreement. In fact, petitioners themselves agree in the present petition that
theyusedtheirlongstandingexpertiseintherealestatefieldandtheirgoodofficestopersuade
M/s.EraLandMarksIndiaLimitedenterintoajointdevelopmentwiththerespondentcompany
which ultimately resulted in Joint Development Agreement dated 05.07.2008 coming into
existence on account of the negotiation and discussion made by the petitioner. It is because of
this precise reason the agreement dated 26.04.2008 between respondent and petitioner came
intoexistencewhereunderrespondentagreedtopaytothepetitionersaprofessionalfeeof`2.50
crores. The said contract is a contemporaneous contract entered into between respondent and
petitioner. In other words, the performance of obligations under the said agreement was
dependent on the performance of the obligations by the parties to the JointDevelopment
agreementdated05.07.2008AnnexureA.
26.On account of various reasons, the parties namely, the respondent and the developer could
notimplementtheAgreementdated05.07.2008initsentiretyandassuchtheyenteredintoan
Addendumagreementon28.10.2009AnnexureR2underwhichitwasagreedtobetweenthe
partiesthat:
(1)Undividedshare/interestoftherespondentcompanywouldbereducedfrom37%
to29.5%.
(2) Security deposit payable by developer to the respondent was reduced from ` 35
Croresto`25Crores.

(3) The loan amount agreed to be paid to HUDCO is now agreed to be paid by the
developerfromoutofthesecuritydepositpayabletotherespondent.
These conditions agreed to between the parties would indicate that there was substantial
modificationamongstotherconditionstotheoriginalagreementdated05.07.2008.Thiswould
alsoindicatethatclaimofthepetitionerwhichwasbasedontheJointDevelopmentAgreement
dated 05.07.2008 got eclipsed by virtue of the Addendum agreement dated 28.10.2009 and
thereby benefits which would have accrued to the respondent got substantially reduced. It is
becauseofthesesubsequentdevelopments,therespondenthasattemptedtostaveofftheclaim
madebypetitionercontendingthatdebtisnotadmittedandsuchapleacannotbebrushedaside
as a false defence. It is to be further noticed that respondent company and the developer are
nowatloggerheadsandtheyhaveignitedthearbitrationproceedingsandsameispendingbefore
the Arbitral Tribunal as admitted to by the learned Advocates appearing for the parties. In this
background,itcannotbeheldorconstruedthatthedefencesetupbytherespondentcompany
tobeeithermoonshineorafrivolousonetodiscarditortoconstruethesaiddefenceraisedby
therespondentwithoutanybasis.Inthatviewofthematter,Iamoftheconsideredviewthatthe
disputeraisedbytherespondenttodenytheclaimofpetitionerisbonafideandoneofsubstance
andsuchdisputecannotbeconstruedasfrivolousorbrushedasideasacloaktohideitsinability
to pay the debt and prima facie respondent has established that plea putforward by way of
defenceinthestatementofobjectionsisabonafideplea.Inthatviewofthematter,pointNo.(2)
formulatedhereinhastobeansweredinfavourofrespondentandagainstpetitioner.
27.Inviewofthefactthatarbitrationproceedingsarependingbetweenrespondentcompanyand
the developer M/s.Era Land Marks India Private Limited , New Delhi, petitioner would be at
libertytoworkoutitsremediesafterconclusionofarbitrationproceedingsandlibertyisreserved
tothepetitionerinthisregard.
28. For the reasons aforestated, Company petition is hereby dismissed. Parties are directed to
beartheirrespectivecosts.
Sd/
JUDGE*sp